Since the creation of Bitcoin, the network difficulty went from 1 to 48.71 trillion hashes that a miner would theoretically need to generate to find the winner. This means it is 48.71 trillion times harder to mine a Bitcoin block today than when mining began in 2009, a compound increase of 20.64% per month.
As of this writing, Bitcoin’s difficulty is at an all-time high, meaning miners – on a BTC basis – are earning less rewards per unit of hash rate than ever before. Apart from bitcoin price, bitcoin difficulty is a primary factor influencing hash price (mining revenue per unit hash rate), so miners are interested in projecting Bitcoin hash rate growth and difficulty trends for business planning.
To this end, miners and Bitcoiners have devised the Constant Block Time method to estimate upcoming adjustments, but this method typically overestimates or underestimates difficulty changes at the start of each difficulty epoch.
To improve this, the Luxor Technologies team has developed a new method called the “rolling block method”, which we describe in more detail in a recent report on forecasting Bitcoin mining difficulties.
We hope that the rolling block method for predicting Bitcoin’s difficulty could provide miners, investors, and hash rate traders with a better tool for planning changes in difficulty.
Luxor’s “rolling block method” for predicting difficulty adjustments
For this report, we developed a new time series prediction method for upcoming difficulty adjustments, which improves accuracy at the start of the epoch compared to the constant block time method. We call this the succinctly named “epoch-adjusted, square-root-weighted, rolling 2015 block time method” (or simply “rolling block method”, “adjusted block time method”, or “double -time”. method of the time”).
This new method improves on the constant block time method at the start of the epoch by including block times from the previous 2,015 blocks, instead of only blocks from the current epoch, which can skew predictions at the start of the epoch. epoch due to lack of data points. To account for the change in network difficulty between epochs, the previous epoch’s block times are adjusted by the previous adjustment. And finally, we weight the average block times of the current epoch with the square of the proportion across the epoch. This final step is to lessen the impact of block times from the previous epoch as the current epoch progresses, as these values don’t actually determine the upcoming adjustment.
In the graph below we can see through the confidence intervals that the new method performed better than the old model at the beginning of the era until block 650, but performed slightly worse by the following :
This prediction, of course, only serves to project the next difficulty adjustment. What if we wanted to predict, say, a year into the future?
Bitcoin Mining Difficulty Long Term Prediction
Luxor has developed models for predicting long-term difficultiesalso, but these models are obviously much more complex, since they extend over a longer period.
Our model takes bitcoin price, transaction fees, and block subsidy as inputs on the demand side, and internal data on ASIC production estimates and the distribution of operating costs across the industry on the side. of the offer. Using these inputs, the model produces an equilibrium hash rate, difficulty, and hash price for 18-month periods.
The structure of the model reflects reality; hash rate, difficulty, and hash price are endogenous to the system, not exogenous determinants of each other. We can also perform sensitivity analyzes with the model on all inputs. For example, we can predict an equilibrium hash rate, difficulty, and hash price over a range of bitcoin prices.
The graphs below show the projections of our updated hash rate supply and demand model. It provides estimates for flat, bullish, and bearish bitcoin price scenarios.
Updates to hash rate, difficulty and hash price predictions
Hash rate is an emerging asset class and digital commodity market. Hashrate market participants such as Bitcoin miners, hosts, lenders, investors, and traders need access to the rigorous economic analysis and data available from other commodity markets.
Luxor undertakes to provide this analysis and forecast on a quarterly basis. If you want to know more, please visit this post.
This is a guest post by Colin Harper. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.